Partnership: the second business model
A partnership is a business marriage of sorts, with many of the advantages and disadvantages of the sole proprietorship.
Personalities are an inherent part of the equation in the success or failure of the venture, and thus the business can become ‘personal’ in ways not contemplated when the partnership was formed.
The many partnership jokes and anecdotes illustrate that when a partnership goes wrong, it’s more than the business which is at risk: it’s the relationship as well.
Knowledgeable and informed advice from a lawyer with proven business experience can be of great benefit to both.
First things first: Advantages and Disadvantages
Primarily, partners provide someone with whom each owner can share responsibilities, decisions and financing. They might have complementary and unique skill sets that give the business a clear advantage: one partner, for example, might have the specific and required technical skills while the other has a business background.
It’s relatively easy to fill out the government forms, choose a name, split the small fee and create the partnership. Similar to sole proprietorships, partners pay only their personal income tax and retain full profit since there are no corporate taxes involved.
The main disadvantage, as per a sole proprietorship, is that the partners are legally responsible for all aspects of their business: they can be found liable and sued. Personal finances, bank accounts and family homes are all vulnerable. It is little comfort that there is someone to share this devastation; worse, one partner might blame the other.
Consider a ‘Prenup’ Partnership Agreement
In addition to taking steps to minimize your exposure to such liability, there are other significant decisions that prospective partners should consider. Resolving these matters when the business is formed can save aggravation and expense later. Consider it a sort of “prenup’ for business.
As part of such an agreement, Howard Nightingale offers these services:
- Advise and obtain instructions.
- Create partnership agreement, including any revisions.
- Create dissolution agreements, partnership agreements and business registrations.
Will the Partnership be General or Limited?
These are two variations of the partnership arrangement, and they can significantly alter it. The general partnership with its 50/50 agreement is the familiar one. However, the limited variation identifies one person as the controlling partner who will bear the major responsibility for debt and contractual obligations, while the remaining partner’s exposure is limited to his or her investment or holdings in the partnership. Profits, therefore, might not be equal, and the controlling partner can be more vulnerable in a lawsuit.
Some considerations for dissolution agreements
- Setting the terms for the dissolution of the company.
- Resolving the issue of selling to a third party.
- Resolving the issue of the right of first refusal.
- Considering how the selling partner’s share will be valued.
- Considering terms of buyout financing.
Why You Need a Dissolution Agreement: A Real-Life Scenario
Partner A wished to sell; however, with no dissolution agreement in place the partners could not agree on anything, including value and financing. Eventually, partner A found an interested third partner willing to buy him out but partner B objected to being in business with a stranger. Both were legitimate points of view which unfortunately conflicted with each other. Eventually their friendship turned to rancor; they ended up not speaking to one another and the workplace environment became poisonous. It took years and a great deal of legal expense to finally resolve the issue.
The time for discussion of these issues is when the partnership is being established. This is where the advice and guidance of a lawyer skilled in such business contracts is not only invaluable, but just might preserve a life-long friendship.